Solo Cup keeping head above water in recession after rough start in merger with Sweetheart

March 02, 2009|By Greg Burns

It sounds like a recession-era nightmare come true: East Coast financial sharpies wrest control of a family-owned Chicago icon.

At Solo Cup Co., however, the sharpies arrived just in time to rescue the kingpin of disposable tableware from a probable date with disaster.

Like so many firms, Solo is trying to stage a turnaround during a punishing downturn. Unlike so many, it has outrun some of its most threatening demons.

Its trouble started in earnest five years ago, when the founding Hulseman family paid a rich $904 million for rival Sweetheart Cup. After that, very little went right. Despite costly integration efforts, the computer systems didn't work together. Instead of scrapping obsolete machinery, Solo paid to redeploy it. Trying to be everything to every customer, the company carried loads of money-losing products.

Besides hocking assets to finance the deal, Solo -- fatefully -- sold a one-third ownership stake to Vestar Capital Partners for $240 million. The private-equity firm drove a hard bargain: If financial targets were missed, Vestar could commandeer the board of directors. Lucky for Solo, it soon did.

In 2006, with Vestar backing, Sweetheart veteran Robert Korzenski took over as chief executive from Robert Hulseman, the septuagenarian son of Solo's founder. Since then, Solo has closed plants, replaced old equipment and sold assets to pay down debt. It culled the product line of money-losers and launched a "green" initiative.

Its leverage ratios tell the financial story: Debt has fallen from more than eight times cash earnings to less than four. "We're not finished with it," Korzenski said. "We watch every dollar." The company reports results to public debtholders in mid-March.

Under Korzenski, Solo cut health benefits and tax advice for Hulseman family members previously paid as consultants. The few still on the payroll earn market-rate salaries. After all those years, the transition had to be painful for the family, which declined to comment.

Given the recession, success is not assured: Solo's big food-service business is under pressure as consumers cut back on eating out. And while its new products are doing well, Korzenski said, "It's a very, very difficult period."

The Solo-Sweetheart merger bombed at the outset, but it provided significant scale. That has proven important in weathering the recession, especially the oil shock this summer, when raw material costs soared, Korzenski said. "I'm not sure if either of those two companies would be around today if they hadn't done this."

Paying down debt over the past two years made all the difference, said Bill Densmore, a senior director at Fitch Ratings in Chicago. Otherwise, Solo "certainly" would have violated its bank covenants by now, he said. "They would be in much worse shape."